With more than 20 years in the real estate and relocation business, Kenneth Arbour, President of Century 21 SKY Realty, is providing a 4-part series of articles covering interesting trends in the marketplace.
By Kenneth Arbour
These articles are drawn directly from Mr. Arbour’s extensive experience in residential and commercial sales and leasing, and presented from a ground-level perspective.
Tackling the Real Estate Market in Tokyo
Riding the Wave in the '80s
It’s been a roller coaster, a ride that not only reflects the dramatic changes in real estate values in Tokyo itself, but also the often topsy-turvy nature of perhaps any business. When I first started with Century 21, land values in Tokyo were rising at an incredible clip – 100%, 200% maybe more – every YEAR! It really could not last, but who ever believed it would? After all this was 1987, and in the four decades since the war land prices had never fallen. Why shouldn’t the Imperial Palace be worth more than the State of California? The Nikkei was hitting 37,000! This was the Japan that could say no!
And actually Japan as a country did say no. It was typically a bunch of bureaucrats, who, with less than what should have been the expected amount of fanfare given what was to take place, brought in the National Land Law. The what? Yes exactly. Who knew what the heck it was? But one of the requirements of this new law was that every property transaction over 100 square meters – not very big – would require the approval of a government employee empowered to reject any deal he saw as inflationary. So picture this: you are a real estate agent, you have two people ready to make a deal. They have agreed on the price, the removal of tenants or old buildings, renovations, setbacks, the buyer has secured financing, everything is in place except for one small factor, the approval of the planning guy over at the ward office who takes one look at the price and tells everyone to go home and renegotiate – to something lower. What the %#&*$!
And that was it. The bloom was off the rose. Once it was clear that properties being sold at less than a 1% annual rate of return would never be viable since there would be no capital gain, the whole thing collapsed. The dive in the Nikkei was more obvious, but that had a lot to do with the fact that a large number of share transactions occur every day and the prices were right there in the newspaper. And, don’t forget, the high value of many Japanese companies rested largely on their vast real estate holdings. Even if they were not sold, these assets were declining rapidly in value, as was the companies’ ability to borrow ever larger amounts of money against them to finance overseas expansion, capital investment, or new factories. With those reduced assets, the companies became less creditworthy, their borrowing costs rose, many had trouble, and some didn’t survive.
We had a client then who saw the National Land Law coming, starting the next October, and thought it would be very clever to buy the most expensive properties of less than 100 square meters they could find. They figured since these small properties would escape bureaucratic review they would continue rising in price forever. This was like thinking that the market for the Hope Diamond would collapse, but all the little stones would just keep rising in price. I know this sounds ludicrous now, but in 1988 we had only been in business a year. The National Land Law was just another proposed government measure that might or might not have happened, or might have been fatally watered down. Or it might have been like the end of government guarantees on bank deposits, which keep getting pushed back until they will no longer have any impact. So this potential buyer came to us – introduced through a large trading house – and they were searching for the best, the purest, the most beautiful small diamond. And we found it for them in Kyobashi: just 28 tsubos (3.3 square meters or 36.7 square feet). At the now unbelievable price of JPY190million per tsubo, we had a deal.
To put this into perspective, I remember waking up in the middle of the night in June of that year with a dark feeling that we weren’t going to make it with this real estate company I had helped establish with a couple of Japanese guys whose names began with “S” and “Y”—my “K” gave us Century 21 “SKY” Realty. Money was going out, but not much was coming in. Things looked bleak. It had been a year. Virtually all our initial capital was gone. I, among others, wasn’t being paid.
Then came July! For the first time we made JPY10million in commission income – from our leasing business, even though we had entered real estate in the first place to go after the luxury expat rental market. This was a huge amount of money for us. But not only that, we flew down to Guam and started to help assemble the beachfront property for what would become the Onward Hotel on Agana Bay. And last but certainly not least, there was Kyobashi. It is hard to describe our feelings at this time...no, it’s not. We were jubilant.
Real Estate Tips for Personal and Commercial Investments
Obviously the market has changed significantly since then, but surviving those early days has given our sales staff tremendous insight into what is necessary to survive, and adequately serve our customers, in a very competitive market.
So we now feel qualified in talking with expats looking for rental housing, potential home-buyers, businesses and investors seriously looking for properties.
With people looking into purchasing a home in Tokyo, we suggest that they stay in central Tokyo (the Shibuya, Hiro, Roppongi and Akasaka neighborhoods), with a focus on reasonably new properties when possible.
With property values going up in the central area, of course money will go further in the areas outside the JR Yamanote Line train loop. All that said, if a home-buyer only has JPY20 million, JPY30 million or even JPY80 million, they have to face the reality of not being able to afford anything big in Tokyo. Then there are the particulars of personal real estate in Japan including getting nailed with registration taxes, inheritance taxes, etc. Next, potential purchases should determine whether they are buying a property for living or as an investment. Quite a few members of the international community buy properties they intend to live in, rather than with an eye on leasing them out. It’s good to keep in mind though that you don’t have to stay in Japan once you’ve purchased a property. You can buy it as an investment and then leave the country.
Starting the Search
It is almost always a better bet to start with a real estate agent rather than trying to browse on the internet. While an online search might give you a general idea of availability and prices, the devil is in the details, especially when sinking US$1million to US$2million into a property.
As one example of what home seekers are going to encounter, it is highly unlikely they will find a Western-style house he or she wants to live in. Japanese contractors, in general, don’t build these homes for foreigners – they are built for Japanese tastes. In these cases, expect the ceilings to be too low, the rooms too small, and there will probably be only one bathroom.
Financing a Personal Loan
One thing that should be understood is that anyone is eligible to buy real estate in Japan. If you don't need to get financing from a bank, for the most part there will be no problem. The main problems which people have often heard of involves securing loans from banks. However, that situation has changed tremendously in the past few years with banks loosening their requirements for foreign residents seeking credit. In general, I would say it is essential that you have either permanent residency or a long-term visa when applying for a loan. If a person doesn’t have permanent residency, banks probably won't be interested in dealing with you, although some banks will talk with you if you are not a permanent resident. It should be expected that all the banking transactions and documentation will be in Japanese.
Other factors include how much the property's owner and the banks want to sell. In the bubble era, there was a significant amount of property that just sat there for 5 or 6 years. If an owner really wants to sell it, then they'll be more cooperative in helping you secure loans. That makes life quite a bit easier.
Once financing is secured and you know what you want, there shouldn't be any problems. After that, everything related to the transaction can be completed in as short as a month.
The next article in this series will cover more details on the end of the real estate bubble in Tokyo.
President, Century 21 SKY Realty